Keep Uncle Sam’s grubby hand off your scholarship $$$

October 16, 2008

I’ve been asked a few times are scholarships a taxable event?

The answer may surprise you. The answer is yes and no depending upon the variables and its usage.

Degree candidates (that is a student who is taking classes that will ultimately be used to earn a degree) do not need to report scholarship money that is used for qualified educational expenses. That would include tuition, course fees, course-required books, supplies, labs fees, and equipment.

This means that as long as the scholarship money is allocated for qualified educational expenses it is not a taxable event. However if the scholarship money is used for non-qualified educational expenses such as books that are NOT required by the course or not required by ALL students in the course; then it does become a taxable event.

Hey, you didn’t mention room and board. That is because room and board is considered a non-qualified educational expense. But hey, my kid has to live somewhere and most colleges now make it mandatory that Freshman live on campus. Yep, don’t you just love the IRS and their rulings…

Here is an example. Susie Student receives a scholarship for $5,000. She uses $4,100 of the scholarship money on tuition, course fees, and books; the remainder was used for room and board. So, Susie’s income from working in the college bookstore is added with the remainder of the scholarship money. This means that she must report the difference of $900.00 plus her earned income.

Or this one. Calvin College-Student is taking a couple classes that will not lead to a degree and happens to land a scholarship that will cover it. This is a taxable event. The whole enchilada must be reported.

So before you jump up and down and run through the neighborhood screaming “I won! I won!” Read the small print. Ask the college and scholarship grantor if the money can or will be applied to room and board or to tuition and other qualified educational expenses.

Remember to talk with your tax advisor CPA regarding all tax ideas and strategies.

(P.S. remember to tell a friend about this website and come see me live and in person at one of the informative, enlightening and enjoyable free workshops regarding college admission strategies, financial aid strategies and plain-ol’ good common sense. Click the link on the right.)

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